Bitcoin is a deflationary economy, so you should not expect there to be nonzero time value of money. Any interest you earn will be the risk premium for the chance you take of the "bank" going bust.
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eldentyrellOct 9 '11 at 7:45

5

@eldentyrell Even if there is deflation a bank should be able to give a higher interest rate than Bitcoins standing idle in a wallet.
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DavidOct 9 '11 at 8:35

1

@eldentyrell - also in fiat economy, you take the chance of the bank (or its backing government) to go bust.
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ripper234Oct 9 '11 at 12:01

@this_site_is_a_cesspool, You are mistaken. As long as the currency has "business potential" (can be used in a business to make more money), the time value of that currency will never be zero. Yes, inflation/deflation will affect the %, but it will never be zero for the same reason 1 will never be 0 even if you divide it by an extremely large number.
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PacerierMar 8 '14 at 2:51

9 Answers
9

Please Take Note: Flexcoin has been hacked and is no longer operating.

Original Post shown below:

Right now, the closest thing you can find to a bank is Flexcoin. If you keep your money there, you will receive a variable interest (they call it discount for legal matters) every month. They also have a user defined cold storage service available for those who want to keep their funds offline.

Here is how it works. Every time you withdraw money from Flexcoin, you pay a fee:

Fees:

Flexcoin to Flexcoin = FREE
Bitcoin to Flexcoin = FREE
Flexcoin to Bitcoin = 0.01 BTC or one half of one percent of the transaction amount (whichever is greater)
Cold Storage Transaction Fee (outbound) = 0.02 BTC or one percent of the transaction amount (whichever is greater)
Cold Storage Transaction Fee (inbound) = 0.01 BTC or one half of one percent of the transaction amount (whichever is greater)

This fee is used to pay miner fees and keep the service running. The rest of it is distributed among clients:

Discount Payout:

70% of the fees collected are disbursed to the account holders as
discount payments on any fees already paid or any potential future
fees, based on the following formula…

Here are twobitcointalk threads about the discount payments for the first two months.

As a final note, I would like to say that I personally think that this kind of service is not very useful right now because the Bitcoin price is too unstable. For example, yesterday the price dropped 15%. Any interest you might earn becomes irrelevant in this scenario.

It is wrong to say that this kind of service is not useful due to unstable pricing. The short time price swings are irrlevant if you are aiming for long term storage. 101 BTC will still be worth more than 100 BTC regardless of the price.
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PacerierMar 8 '14 at 2:56

In theory, such a thing could be created. 10 Bitcoins today is worth more than 10 Bitcoins tomorrow. If you don't see why, just ask yourself this: Would I rather have 10 Bitcoins today or 10 Bitcoins tomorrow.

Obviously, you'd rather have the 10 Bitcoins today. Why? Because you can hold them for a day and have the 10 Bitcoins tomorrow. Plus, you have the extra benefit of anything you'd prefer to do with them today rather than holding them until tomorrow.

However, to set up such a bank right now, you'd have to use the following method:

You convert the Bitcoins to whatever national currency had the highest interest rate.

You loan out that money or place it in bonds or other secure investments.

At the end of the term, you buy back Bitcoins to pay back the depositor.

The problem, of course, is that the value of Bitcoins could shoot up while the currency is loaned out. To protect against that, a bank that used this model would have to offer offsetting shorts to cover that loss. Basically, that means it allows other counter-parties to buy a derivative that goes up if Bitcoins go down and down if Bitcoins go up.

This way, if the price of Bitcoins goes down, the bank makes extra money buying back the Bitcoins at a lower price, but it has to pay out on the shorts. If the price of Bitcoins goes up, the bank loses money buying back the Bitcoins, but makes it up on the shorts.

If the bank itself offers the shorts, it actually makes extra profit on the shorts either way. It makes some profit on the loan and some on the shorts. (Whether Bitcoins go up or down cancels out. Any extra profit on the loan, due to Bitcoins going down, is made up with a loss on the shorts. Any extra profit on the shorts, due to Bitcoins going up, is made up with a loss on the loans. If Bitcoins stay the same, the bank makes its small commission profit on both the loan and the shorts.)

There are definitely people who believe that, long-term, Bitcoins will gradually drop to near-zero value, and they would like to buy shorts on that basis. However, the shorts would likely have to be more short-term unless the loans were long term. So making the details work could be quite a challenge.

Your model is unsustainable. It would require a infinite liquidity in the derivatives market. I think we have only three possible options: 1) Bitcoin Bonds return should be computed over $ - 2) The bitcoin becomes more stable - 3) The bitcoin economy starts to create more opportunity, without the need to convert them in $
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MascarponeOct 9 '11 at 12:39

4

It doesn't require infinite liquidity. It just requires that you match shorts to loans. It only requires infinite liquidity if you insist on zero risk or expect to be able to issue unlimited amounts of shorts or deposits.
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David SchwartzOct 9 '11 at 13:09

I don't think a bank offering that would/should be trusted right now, because the bonds market is too shallow.

The way I see it, we have to see a large increase in the bonds market beforehand. There will be a lot more bonds, some riskier/boarderline scams, and some more "serious" (e.g. Gavin or Mt. Gox issuing for a bond would probably not be treated as a scam by ... almost anyone). The interest rates of these various bonds will vary.

After this market materizlies, some trusted 3rd party can come and slide & dice these loans into something more structured. E.g. if within a year we had a range a bonds, with interest rates running from 2% to 10%, then a big player ("bank"), trusted by the community, can come and offer a safe interest rate of 1%. He would then invest in the bonds with some risk distribution, and make an arbitrage. Some bonds will default, but that's ok, because the overall portfolio of the bank should usually increase over time by more than 1%.

I know many people who accept Bitcoin Loans and promise a return, which in finance is known as bond. The problem is: Can you trust them?

At the moment no serious emitter is available,
in the near future MtGox and Tradehill will start offering such services. and it seems like no candidate is available in the near future. Mtgox and Tradehill will launch Options soon, which are slightly different than Bonds, in the fact that there is no guaranteed return.

If you are interested in investing in a start up drop me a mail to straccia.mi@gmail.com

My co-founder and I run the site Bitbond where you can finance Bitcoin loans (Bitbonds) of other people who present their funding project on our marketplace. That way you can earn interest on your Bitcoins. Technically this resembles a bank since we also offer a secure wallet.

It is easily possible to start a Bitcoin based bank. You would simply take Bitcoin deposits and grant loans to other customers who will pay interest on these loans making a margin from the interest rate spread. Then you would have what you ask for, an account where you earn interest on your deposits.

I just don't believe this is a good thing. One of the main reasons why the fiat banking system is in such huge trouble is that they take short term money (their client's deposits) and lend it out long term (for loans, mortgages etc.). When people who lent money to the bank through their deposits want to withdraw their money earlier and in a larger extent than expected, banks get into huge trouble.

There used to be a golden rule of banking that basically said to match maturities. Long term loans should be refinanced long term. But fiat banks don't stick to this rule anymore for a long time. It's just more profitable to take cheap short term deposits and put them in long term assets. But it makes the whole financial system sink.

So to cut it short. Yes a Bitcoin bank is easily possible but we, the users of Bitcoin, are better advised to stick to the golden rule of banking. That's what happens at peer to peer lending.

You stated "but fiat banks don't stick to this rule anymore for a long time". Are they actually allowed to do that?
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PacerierMar 8 '14 at 3:17

Yes, banks are allowed to do that. The "golden rule" is not a law but rather an inofficial guideline. It's more profitable for banks to borrow short-term and lend long-term. And since there is deposit insurance, the bank's clients don't have a reason to care. When a bank messess it up, most of the client's deposits will be covered by the insurance. So nobody is giving banks an incentive to stick to the "golden rule".
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Radoslav AlbrechtApr 1 '14 at 16:59

So why couldn't a bitcoin bank do that as well?
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PacerierApr 4 '14 at 23:42

A potential Bitcoin bank could borrow short-term and lend long-term as well. For the reasons stated in my main answer I just don't think it's a good idea. In the end it's simply the users who decide which services they support and which they don't.
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Radoslav AlbrechtApr 7 '14 at 22:28

There cannot be a bank that pays interest on BTC, because there cannot be a bank that lends BTC. No one would borrow an appreciating currency, and no one would lend against collateral that depreciates relative to the real value of the outstanding debt.

Banks make money by lending in a currency that the parties expect to depreciate modestly over time. The nominal interest rate compensates for the expected inflation, effectively amortizing the real loan over time. That is an appropriate outcome, because the underwriting data on which the loan was based becomes stale over time, raising the statistical risk associated with the loan; the declining real balance, along with appreciating nominal collateral, offsets this risk.

Absent a depreciating currency, there is no banking. (And, if there is no banking, there is no economy, which is why bitcoin cannot be a currency but only a means of transmitting currency).

People will borrow currency regardless of whether it's appreciating or depreciating as long as they can reasonably expect to get back more (e.g. by investing those money in their business etc). Banks make money by lending money to businesses which pays interest. Yes, upon an inflationary currency, banks may benefit more, but upon a deflationary currency, banks will still earn.
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PacerierMar 8 '14 at 6:22

First of all, you should have a good answer to the non-trivial question:

If I deposit 1 BTC in a "bank" and expect to get more than 1 BTC back, where did that extra (interest) come from? You don't expect an ounce of gold to increase in mass.

If you are like most people, you do not understand that banks do not lend money! When you get a so-called loan in a bank what the bank provides is a "promise to pay" (Google 'checkbook money' and 'fractional reserve banking'), it provides credit - not money.

Credit, which is the same as debt, can be infinite in supply and as long as the more people (or states or corporations) keep adding to the total debt faster year after year than the rate of interest the system can stay solvent.
However, if people take out too few loans to service the interest on old loans the system collapses (in a so-called 'deflationary spiral'). By the way, contrary to popular understanding the 'deflationary spiral' phenomenon has little or nothing to do with "people hoarding money", but everything to do with shrinking money supply (debt).

One GREAT feature of Bitcoin is that people can easily hold their own money in their own wallets (ie. NOT deposit the BTC in banks or online wallets). This prevents the banks from issuing "promise to pay BTC" in the usual fraudulent (but legalized!) way that regular banks do.

Morale - be careful what you wish for.
Interest-giving BTC accounts is the kind of thing that would lead me and many others to give up on Bitcoin because once you accept promise-to-pay BTC as real BTC, the supply cap is no longer 21 million, but infinite - and Bitcoin will go the way of the fiat currency. (Die)

Real, sound, currencies like precious metals or BTC do not give interest - and for exactly the same reason. This is a good thing that we should all fight for.

This does not answer his question. Also, your answer invites to a discussion that is not suited for a Q&A site.
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D.H.Oct 8 '11 at 19:54

1

D.H., are you one of those StackExchangeCultureNazis? I upvoted this answer for nothing other than "you don't expect an ounce of gold to increase in mass", which is probably the most insightful sentence in any of the answers to this question.
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eldentyrellOct 9 '11 at 7:50

1

@eldentyrell: I certainly don't want to come across as a "Nazi". It's just that this question is not supposed to discuss whether or not we should have Bitcoin banks. We certainly could have. If you want to invite to a discussion on whether or not we should it's better to use the comment field and add a link to a forum post or a blog where it could be discussed. Using the chat here on SE is another option. I apologize if I come across as a Nazi.
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D.H.Oct 9 '11 at 9:33

While this link may answer the question, it is better to include the essential parts of the answer here and provide the link for reference. Link-only answers can become invalid if the linked page changes.
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Murch♦Dec 13 '13 at 11:15

You could fill the 30 characters with a description. Your link is relevant
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DavidJul 26 '13 at 9:09

1

Hi sahra! Like David says, please add some description to make the answer more helpful. Also, when writing links in an answer, make sure that they are clickable. Thanks!
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D.H.Jul 26 '13 at 9:41

1

While this link may answer the question, it is better to include the essential parts of the answer here and provide the link for reference. Link-only answers can become invalid if the linked page changes.
–
Nick ODell♦Jul 26 '13 at 21:17